Original URL: http://www.theregister.co.uk/2013/04/05/xyratex_q1_2013/

Xyratex tight-lipped over unimpressive first quarter

Loose lips sink ships, but sometimes they sink anyway

By Chris Mellor

Posted in Storage, 5th April 2013 11:47 GMT

Comment As expected and following on from its board caving in to Baker Street Capital Management and ousting of CEO Steve Barber, Xyratex's quarterly revenues are down 34 per cent year-on-year.

Revenues for Q1 2013, ending 28 February 2013, were $195.6m, which contrasts badly with the $295.7m reported a year ago and the $265.4m reported in the previous quarter.

Xyratex revenues to Q1 fy2013

Click on the chart to see a bigger version

There was a net loss of $5.1m in Q1 2013, a big reversal from the $10.9m profit made a year ago. That was quite an achievement, as the previous quarter's revenues of $265.4m saw a loss of $7.9m. Yet this latest quarter, with revenues almost $70m lower, saw a $2.8m smaller net loss compared to Q4 2012.

Interim CEO Ernie Sampias was glum and said virtually nothing in the earnings statement:

We had a solid first quarter with revenues above our expectations. We are focused on being responsive to our customers’ requirements and on improving operating efficiencies in both of our business units as we go forward in 2013.

Translation: it wasn't such a horrible quarter as we feared.

Hopefully he said more in the earnings call otherwise the analysts would have been baying for his blood.

Interim CEO's thinking

Sampias indicated the board's current thinking about the existing disk drive manufacturing process equipment:

Within our 2 core businesses, the OEM Storage Solutions business and the Capital Equipment business, we continue to develop and deliver compelling technology through our established customer base, as well as consistently identifying new customer and product opportunities. We see both of these businesses providing long-term contribution to the company.

Hello, hello; so ClusterStor, the HPC array business, does not. Speaking of which, he went on to say:

With our more recent strategic initiatives to address the High Performance Computing, Big Data and cloud markets, we are making encouraging progress.

Load of pish. Ernie, the only reason you are sat in the 'interim CEO' chair is because the existing core businesses are delivering substantially lower revenues and the newer business has yet to take off.

Regarding Xyratex's near-term future, Ernie said:

We will be looking to focus our investments within the areas where we have already had significant success and will carefully review our opportunities to expand into new markets, verticals and geographies.

Pish again, Ernie. Existing ClusterStor customers will be very worried that the product line is effectively a dead man walking. They will read those words and immediately fear you're looking to keep it alive until you can sell it, spending the minimum amount of cash on it you can get away with in the meantime.

Helpfully, Ernie then reinforced this perception:

My priorities will include a detailed cost analysis of development activities and being disciplined in our expenditures and investments while also making sure that our businesses deliver more consistent and reliable returns.

Later in the call, though, more details emerged about Xyratex's intentions for ClusterStor.

CFO Richard Pearce indicated where revenues declined in more detail:

Sales of our Enterprise Data Storage Solutions products in the first quarter were $176.5m, representing a decrease of $95.5m or 35 per cent compared to the first quarter of last year and down to 12 per cent compared with $200.1m in our prior fiscal quarter.

A large contributor to this decline was lower sales of NetApp, which accounted for 45 per cent of Xyratex's revenues in Q4 2012. Also:

Sales of our Capital Equipment products in the first quarter were $19.1m, down 19 per cent compared to the first quarter of last year and down 71 per cent compared with our prior fiscal quarter.

But the results reflect a seasonal pattern and outlook in this area is good:

We have experienced a good level of customer orders in the first quarter and expect to record significantly higher revenues in the remaining 3 quarters of fiscal 2013.

Gross margin had improved mostly due to higher-value ClusterStor sales; the very product line whose life is threatened by the changes to the board. There was some restructuring (aka job losses - 63 heads) in the quarter and more of the same is expected in the current quarter, "primarily in connection with our OEM Storage product lines."

Polish your CVs, people.

Drive array business

The OEM customer shares of Xyratex business in the quarter were revealed:

Xyratex OEMs

Nominal values for HP and Cray.

Pearce indicated the board's thinking about the storage disk array business:

We believe that there is pent-up demand for storage that could be released over the next several quarters as a result of the growing demand for Big Data solutions. In fact, long term, storage demand should continue to benefit from the growth in unstructured data as more digital content is moved online and needs to be secured.

He continued:

The core of the data centre is expected to remain on HDDs given their position of the cheapest and largest repository for exponentially growing data demands, while the edge of the network will increasingly shift to SSDs. Increased disk drive unit capacity results in increased manufacturing test times and increasing requirements for component associated capital products, both of which is positive for our Capital Equipment business.

ClusterStor

Then Pearce turned to ClusterStor, which uses Xyratex's high-density OneStor drive platform:

This platform has recently been qualified by Hitachi-LG and is in qualification with one of our current Tier 1 customers for their anticipated product launch in mid-year ... this product forms the core storage element of our ClusterStor high-performance storage product range. We entered this year with an established and growing business with IBM, 2 major new product programs ramping with HP 3PAR and with the yet to be named new Tier 1 customer, a new and growing relationship with Microsoft and a range of emerging customer partnerships. This business is well positioned to capture further market share as storage brands explore opportunities to outsource their platform designs and focus internal resources on software and applications.

There were 6 new ClusterStor customers in the quarter: one in Asia; 2 new customers within the US government; another large US academic customer; and 2 new large European research facilities.

And then came this gem:

We announced a strategic partnership with Pentaho, a leading provider of data analytics software, and we are working with them to integrate their technology into … ClusterStor … Embedding the Pentaho analytics engine would enable us to address the growing need of the Big Data market by delivering a high-performance data analytics platform later this year.

Which was followed by another pearl:

We will be expanding our ClusterStor portfolio with the release of an exciting new product specifically targeted at the departmental segments of the HPC and Big Data market. We have received very positive feedback from partner customers previews on this product … This new product will enable our ClusterStor business to address an incremental accessible market of approximately $1.6 billion and complements our existing product offerings.

El Reg's storage desk reckons Xyratex would be nuts to dispose of ClusterStor.

Pearce said the disk drive manufacturing process business had structural limitations:

Given the inherent capital spending nature of the HDD industry, it is unlikely that our Capital Equipment business will be profitable every quarter.

So why not sell it?

Xyratex is also moving some manufacturing to Asia and relocating other manufacturing operations from North California to Mexico to obtain cost efficiencies.

The future

A strategic board committee has been set up to examine Xyratex's future. No-one said who exactly is on the committee, although El Reg does know that both of the Baker Street directors are on it. Nobody knows what its thinking is either, although Pearce denied it was thinking about a company sale:

I can say quite openly that the primary objective of that committee is not to sell the company. I think, if you look at the share price today and somebody came in with an offer of $20 a share rather than $10 a share, then the company and the directors would have to look at that very seriously. But I can categorically say, again, that the primary objective of that committee is not selling the company.

Pearce said that the Baker Street position, laid out in a letter castigating the company's R&D focus, could change now it had board-level information access:

I wouldn't read too much into that original letter now that Baker Street are part of the company and, I would say, working with us in a, from my experience at one day with them, a cohesive and collaborative way.

In response to a question about working with Baker Street, Sampias said:

The one thing we agreed with Baker Street on when they were not on the board and just shareholders is the fact that we all believe Xyratex is undervalued. And we're going to do our best to improve the value for all of our shareholders. And that includes the - looking at how to improve the operational performance and more consistent profitability.

So sell the Capital Equipment business dog, Ernie. El Reg reckons Teradyne could buy it.

Xyratex's outlook is for its second quarter revenues to be between $190m and $220m. It doesn't expect to move into profit soon and is effectively in limbo with a distress flag flying over it until a permanent CEO comes in. ®